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Press release 5: HS2 Economic analyis reduced to the absurd

Cost benefit analysis was first conceived for evaluating road schemes where, in the absence of road pricing, or tolls, there is no direct market. The original procedure compared the resource costs with the cash value of time and accident savings plus the savings in vehicle operating costs. All transfer payments, such as taxes, were excluded. The rational was that cash transfers do not create or absorb resources. A similar procedure has been adopted for the railways but with two key differences.

Firstly, railways sell a product. Hence there is a market. In a sane world decisions would be made on a financial basis, namely, if it makes a loss, let alone a loss in the tens of billions of pounds, do not build it. However, if that were the case no railway scheme would ever see the light of day. All of them require massive subsidy from the taxpayer.

Secondly, instead of comparing the cost of the resources used with the social benefits, the comparison is between the “cost to Government” and those social benefits – the so called “Willingness to Pay Calculus”, proposed by Professor Sugden of the University of East Anglia.

Under that dispensation and for HS2 the cost to Government is the capital plus future operating and maintenance costs minus the so called incremental fares - the fares taken by HS2 minus those lost to HS2 by the rest of the railway. Further the benefits are reduced by the loss of tax income due to motorists transferring to the train.

We comment, if people were willing to pay, the system would be profitable. Moreover the theory reduces to the absurd. The proof follows.

Changing the tax regime cannot change the resources used but would change the costs to Government. Similarly, changes in fares policy would change nothing fundamental but would change the incremental fares. Further, if, for example, the rest of the railway were outside the Government then the incremental fares would be the full fares taken by the new route. The analysis would then come out ever so much better. On the other hand, if the Government came to own all the motorway filling stations and cafes, or other elements of the economy, then losses to those elements, due to passenger spending on HS2 tickets, would also be subtracted from the HS2 fares, so increasing the cost to Government no end.

A theory, which provides different answers according to the quirks of the tax system, the fares’ structure, or according to the quirks of Government ownership is clearly absurd. This one has been invented because, without it, no railway project would ever see the light of day. Our view is that it is a fraud on the taxpayer. If they want to build railways they should give the true reasons rather than invent a fraudulent “economic case”.

Paul Withrington, director of Transport Watch comments:

This absurd theory imagines transfer payments create wealth.

If this daft theory were true a case could be made for subsiding most loss making enterprises

“We do not have “brown envelopes” in this country but, in the light of the above we may conclude that there is corruption in that officials and their consultants appear to be prepared to say almost anything in return for salaries in the hundreds of thousands of pounds. It will not do”

For more details, or to arrange an interview, please contact Paul Withrington on 01604 847438 or pwith@transport-watch.co.ukand open topic 17.

About Transport Watch

Transport Watch is an independent think tank founded in October 2002. Our objective is to become the non-governmental point of reference for factual data dealing with transport generally and road and rail in particular. For full details visit: http://www.transport-watch.co.uk/